Law Times

LAW TIMES COVERING ONTARIO'S LEGAL SCENE | APRIL 15, 2019 7 www.lawtimesnews.com COMMENT BY CHLOE SNIDER THE development of crypto- currencies, which use block- chain technology, has given rise to some pressing legal questions. These questions may seem rel- evant only to those who trade in crypto-currencies. However, the development of blockchain technology and its use in com- merce raise legal issues of gen- eral application and concern, as parties increasingly have the ability to conduct business and execute transactions on block- chain platforms through the use of smart contracts. A smart contract is a set of ma- chine rules (if/then statements) that contain parties' promises to, or agreements with, each other, including the protocols that will allow the parties to execute those promises or agreements. Block- chain technology, through plat- forms such as Ethereum and Hy- perledger, can be used to develop smart contracts and is now being used in in a number of industries (like supply chain management, banking and insurance) to trans- act more efficiently. Smart contracts can also be linked to natural language con- tracts, but they do not have to be. Interestingly, some legal tech- nology companies are begin- ning to integrate and link natu- ral language contractual terms with code that will execute those terms automatically through blockchain technology. So how will smart contracts impact lawyers? Are these "smart contracts" actual con- tracts"? What happens if there is a dispute? What kind of reme- dies can you obtain if there is an issue? And are our current legal frameworks sufficient to address these issues? The starting point for an- swering all of these questions will be: Does the smart contract meet the legal requirements of a valid contract? In other words, can we fit this new technology into existing frameworks? Since there is no requirement as to form, there is no reason why a contract written in code could not be a contract where the re- quirements of contract forma- tion are met. In that sense, our legal framework might already be equipped to handle some of these questions and will develop (as it has historically) to address developments in technology. For example, Canadian courts have already found clickwrap agreements to be enforceable (entered into by users clicking "I agree" to website terms and con- ditions). In those cases, courts have held that online contracts can be enforceable, but they should provide sufficient notice so that there is an opportunity to consider and decline the con- tract. Likewise, there is (surpris- ingly) old United States Supreme Court case law to the effect that telegraphic code (even where there was no natural language) could be used to enter into a contract — and that the impor- tant consideration was whether the other party had notice. The common law may likewise evolve organically to address the chal- lenges posed by smart contracts. Having said that, some states, such as Delaware, Arizona and Tennessee, have already enacted legislation that specifically ad- dresses smart contracts, to re- duce uncertainty about their le- gal effect. Legislators in Canada could do the same, in the same way that the Electronic Com- merce Act, 2000, S.O. 2000, c. 17 was enacted to establish that a legal requirement that a docu- ment be signed is satisfied by an electronic signature (where cer- tain conditions are met). The use of smart contracts may also raise other, novel questions, particularly where parties wish to enforce their rights by way of a dispute resolution mechanism (note that, while some people say that smart contracts remove the possibility of disputes, this seems unlikely to be the case for a num- ber of reasons, including that the code itself could have errors or be hacked). For example, many transactions on blockchain plat- forms are entered into pseudo- nymously, which could give rise to questions as to who the con- tracting party was (and whether it was capable of entering into a contract). If so, where does that party reside, and how can legal proceedings be commenced? Another novel issue concerns the remedies that may be available in the event of a dispute. For exam- ple, given that a smart contract on a blockchain is immutable (it cannot be reversed), it may not be possible to rescind the contract — such that contractual remedies may be limited. It is possible that some of these issues could be dealt with in dispute resolution or arbitra- tion clauses. To that end, there may be ways to add code that would direct an issue to arbi- tration and expert adjudicators. There are legal tech projects building in the ability to pause, resume, modify and end a smart contract where there is a dispute and connect the parties to an ar- bitration mechanism. These issues may not be as pressing as those raised by cryp- to-currency trading (as dem- onstrated by the recent Quad- riga proceedings), but they are likely to arise as the use cases for blockchain technology and smart contracts increase. The new issues raised by these plat- forms can likely, at first instance, be addressed by existing legal frameworks that will evolve in- crementally with technology. We may also need to develop new tools to address the issues that the technology raises, aris- ing from blockchain's unique features such as anonymity and immutability. Lawyers may have a lot to contribute to the effective development and use of smart contracts in business. Accordingly, the question may not be whether lawyers are ready for blockchain technology but, rather, whether blockchain tech- nology is ready for lawyers. LT Chloe Snider is a partner in Dentons' litigation and dispute resolution and transformative technologies groups. Her practice focuses on litigating complex commercial disputes, with a focus on technology-related issues, and assisting clients manage risk. BY NIKOL AY Y. CHSHERBININ AND K ALI L ARSEN P unitive damages are meant to pun- ish malicious and outrageous acts that offend the ordinary standards of morality or decent conduct. Since they are not meant to be compensatory, their focus is on a wrongdoer's misconduct, not a victim's loss. In McCabe v. Roman Catholic Episcopal Corporation for the Diocese of Toronto in Canada, 2019 ONCA 123 ("McCabe"), the Court of Ap- peal for Ontario considered and rejected a new category of punitive damages aris- ing out of the timing of an admission of liability. However, its judgment was split with Justice Benotto writing for the ma- jority on all issues but dissenting on pu- nitive damages, thereby creating an op- portunity for his novel theory of liability to be determined by the Supreme Court of Canada. In McCabe, a 67-year-old Robert Mc- Cabe sued the Diocese of Toronto for damages relating to his experience of sex- ual abuse by a now deceased priest, Father Robert, when he was 11 years old. After years of denying liability, the Diocese ad- mitted it on the first day of trial. The only issue at trial was the amount of damages. At trial, the jury was asked: "Does the failure of the Diocese to admit liability before the trial warrant an award of puni- tive damages." Before a question can be put to a civil jury, a trial judge has a duty to determine whether there is reasonable evidence to support the claim. If it exists, the question can be rightly submitted to the jury, which had occurred in McCabe. The jury awarded $15,000 in punitive damages. The Diocese appealed on the basis that there was no basis for the trial judge to leave the issue of punitive damages with the jury. The ONCA agreed and set the punitive damages award aside. The purpose of punitive damages is to punish an inde- pendent actionable wrong. The actionable wrong does not re- quire an independent tort and a breach of a contractual duty of good faith or breach of a dis- tinct and separate contractual provision or other duty such as a fiduciary obligation to qualify as an actionable wrong. Egregious behaviour during litigation has been held to be an independent actionable wrong warrant- ing punitive damages. In determining whether punitive damages should be granted, the court must ask two threshold questions. First: What is the impugned conduct; and, second, whether it raises to the level of egregious misconduct war- ranting punitive damages. In McCabe, Benotto found the Dio- cese's strategic decision not to admit responsibility to a vulnerable victim of abuse until the morning of the trial to be "uniquely egregious," because its re- fusal to admit was hurting McCabe and the ongoing litigation process was caus- ing him to suffer pain. However, justices Roberts and Strathy found that there was no evidence that the Diocese deliberately inf licted pain on McCabe. Nor did Mc- Cabe seek punitive damages on the basis of any misconduct on the Diocese's part but rather because of its vicarious liabil- ity for its employee's wrongful actions. Curiously, McCabe raised the new theory of puni- tive damages based on the Dio- cese's delay in admitting liabil- ity only after the trial judge had advised that there was no foun- dation for punitive damages on the basis of vicarious liability. In his strong dissenting opinion, Roberts found it to be procedurally unfair to allow McCabe to put forward a new basis for punitive damages that had not been pleaded or alleged until after the trial evidence was complet- ed. He noted that a defendant's denial of liability, without more, does not attract an award of punitive damages, but it may give rise to a considerable costs sanction. It is trite law that no defendant is re- quired to admit liability or settle an ac- tion, because it is up to a plaintiff to prove their case no matter how painful the litigation proves to be. A delay to admit liability may give rise to an adverse costs award pursuant to subrules 57.01(1)(e) and (g) of the Rules of Civil Procedure, which explicitly include consideration of a party's conduct that either shortened or lengthened the proceedings and a party's denial of or refusal to admit anything that should have been admitted. However, Roberts reminded that "a defendant's failure or delay to admit liability that falls short of litigation misconduct or abuse of process may not even attract elevated costs." Awarding punitive damages for con- duct during litigation, while not com- mon in employment cases, has a basis in precedent although rarely, if ever, as the sole basis for such awards. In McCabe, Benotto attempted to extend this concept by adding the timing of the admission of liability as a novel ground for awarding punitive damages. On the one hand, this theory represents a troubling develop- ment, because it puts seemingly unjusti- fied pressure on a defendant to expedi- tiously admit liability under the pain of punitive damages; while on the other, it could represent a welcome development, rooted in the duty of good faith and fair dealing, that a party's vulnerability ought not to be exploited as a negotiation or de- lay tactic. When it comes to an award of punitive damages, it is this relationship of reliance and vulnerability that, if outra- geously exploited, justifies such an award. McCabe illustrates that the failure or delay of an employer in admitting liabil- ity does not serve as a standalone basis for the award of punitive damages. However, if a vulnerable employee could establish that the employer's litigation behaviour (for example, lying, obfuscating, delaying, misleading, etc.) was a continuation of its pre-litigation misconduct, which gave rise to the subject of the action, and had a profound effect on him and the litigation process, the novel theory of liability that Benotto propounded could be cautiously invoked. LT Nikolay Chsherbinin is an employment and immigration lawyer and author of The Law of Inducement in Canadian Employment Law. Kali Larsen is an articling student. They can be reached at 416-907-2587 or by visiting nclaw.ca. Speaker's Corner Are we ready for smart contracts? A new category of punitive damages Labour Pains Nikolay Y. Chsherbinin

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